Plant location decisions
Manager’s goal when locating facilities and allocating capacity should be to maximize the overall profitability of the resulting supply chain network. The following information must be available before the design decision can be made;
- Location of supply sources and markets
- Location of potential facilities sites
- Demand forecast by market
- Facility, labor, and material cost by site
- Transportation cost between each pair of sites
- Inventory cost by site as well as function of quantity
The fundamental trade off managers space when making facilities decision is between the cost of the number, location and type of facility(efficiency) and the level of responsiveness that these facilities provide the company’s customers (Internal as well as External)
A firm’s competitive strategy has a significant impact on network design decisions within the supply chain. Firms focusing on cost leadership will tend to find the lowest cost location for their manufacturing facilities even if that means locating very far from the market they serve.
Firms focusing on responsiveness will tend to locate facilities closer to the market and may select high-cost location if this choice allows the firm to react quickly to changing market needs.
Global supply chain networks can best support their strategic objectives with facilities in different countries playing different roles. For example, Nike has production facilities located in many countries in Asia. He facilities in China and Indonesia focus on cost and produce the mass-market, lower-priced shoes for Nike. In contrast, facilities in Korea and Taiwan focus on responsiveness and produce the higher-priced new designs. The differentiation allows Nike to satisfy a wide variety of demands in the most profitable manner.
The following is the classification of possible roles for various facilities in a global supply chain network.
- Offshore facility-low cost facility for export production: – an offshore facility serves the role of being a low-cost supply source for markets located outside the country where the facility is located. The location selected for an offshore facility should have low labor and other costs to facilitate low-cost production.
- Source facility- low cost facility for global production: – A source facility also has low cost as its primary objective, but its strategic role is broader than that of an off shore facility. A source is often a primary source of product for the entire global network. Source facilities tend to be located in places where production costs are relatively low, infrastructure is well developed, and skilled workforce is available.
- Server–facility — regional production facility: – A server facility’s objective is to supply the market where it is located. A server facility is built because of tax incentives, local content requirement, tariff barriers, or high logistics costs to supply the region from elsewhere.
- Contributor facility- regional production facility with development skills.: – A contributor facility serves the market where it is located but also assumes responsibility for product customization, process improvements, product modification or product development.
- Outpost facility- regional production facility built to gain local skill: – An outpost facility is located primarily to obtain access to knowledge or skills that may exist within a certain region. Given its location, it also plays a role of server facility. The primary objective remains one of being a source of knowledge and skills for the entire network.
- Lead facility — facility that leads in development and process technologies: a lead facility creates new products, processes, and technologies for the entire network. Lead facilities are located in areas with good access to a skilled workforce and technological resources.
Focused attention on Distribution Center due to increased production, economies of scale and reduced transportation cost.
Technology wise:
Characteristics of available production technologies have a significant impact on network design decisions. If production technology displays significant economies of scale, few high capacity locations are most effective. This is the case in the manufacture of computer chips, in which factories require a very large investment. As a result, most companies build few chip production facilities, and each one they build has a very large capacity.
In contrast, if facilities have lower fixed costs, many local facilities are preferred because this helps lower transportation costs. For example, bottling plants for coca cola do not have a very high fixed cost. To reduce transportation cost, coca cola sets up many bottling plants all over the world, each serving its local market.
Flexibility of production technology affects the degree of consolidation that can be achieved in the network. If the production technology is very inflexible and product requirements vary from one country to another, a firm has to set up local facilities to serve the market in each country. Conversely, if the technology is flexible, it becomes easier to consolidate manufacturing in a few large facilities.
Transportation wise:
The fundamental trade-off for transportation is between the cost of transporting a given product (efficiency) and the speed with which that product is transported (responsiveness)
Transportation has a large impact on both responsiveness and efficiency. Faster transportation, whether in form of different modes of transportation or different amounts being transported, allows a supply chain to be more responsive but reduces its efficiency. The type of transportation a company uses also affects the inventory and facility locations in the supply chain. For example: Dell flies components from Asia because doing so allows the company to lower the level of inventory it holds. Clearly, such a practice increases responsiveness but decreases transportation efficiency because it is more costly than transporting parts by ship.
The role of transportation in a company’s competitive strategy figures prominently when the company is considering the target customer’s needs. If a firm’s competitive strategy targets customers that demand a very high level of responsiveness and that customer is willing to pay for this responsiveness then a firm can use transportation as one driver for making the supply chain more responsive. The opposite is true as well. If a company’s competitive strategy targets customers whose main decision criterion is price, then the company can use transportation to lower the cost of the product at the expense of responsiveness.
As a company may use both inventory and transportation to increase responsiveness or efficiency, the optimal decision for the company often means finding the right balance between the two.
Typical decisions of location decisions
Deciding where a company will locate its facilities constitutes a large part of the design of the supply chain. A basic trade off here is whether to centralize to gain economies of scale or decentralize to become more responsive by being closer to the customer. Companies must also consider a host of issues related to various characteristics of the local areas in which the facility may be situated. These include: –
- Macro economic factors
- Strategic factors
- Quality of workers
- Cost of workers
- Cost of facilities
- Availability of Infrastructure
- Proximity to customers and the rest of the network
- Tax effects